["Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
This above all: to thine own self be true,
And it must follow, as the night the day,
Thou canst not then be false to any man." - William Shakespeare (1564 - 1616), "Hamlet", Act 1 scene 3]
BY Peter Hutchinson
Advertisers currently spend about $300 billion annually to influence American purchasing habits, and there are roughly 300 million Americans. The cost of advertising is part of the price of goods and services. The math is simple: the average American buys roughly $1,000 worth of advertising per year. Here’s the kicker-a lot of it is paid for with borrowed money. In our experience people tend to downplay the effectiveness of advertising ; that is, they generally won’t admit to being influenced by the advertising they’re exposed to. But the sheer size of the national advertising expenditure and the fact that advertising has represented around 2.5 percent of the American GDP consistently for decades suggest that advertising has a profound effect that may not be noted consciously by consumers but is surely shaping the economy… and society.
A century ago, when advertising was first becoming a ubiquitous feature of modern life, it was sometimes called the “creation of desire.” That sounds a little corny now, but substitute “demand” for “desire,” and it’s an accurate description. When supply is rising and demand isn’t, a producer’s most effective response is to stimulate demand. One of the most powerful and predictable ways to provide that stimulation is through advertising.
Over the past 100 years or so Americans have changed their spending patterns by devoting a smaller portion of household expenditures to food, housing, apparel, and healthcare, and devoting a larger portion to items farther down Maslow’s hierarchy. In total, spending on food, housing, clothing, and medical care declined from 85 percent of the average family’s spending in 1900 to 56 percent in 2003. Spending for everything else rose from 15 percent in 1900 to 44 percent in 2003.
The change in spending habits is attributable partly to declining costs of food and clothing, partly to rising income, partly to innovations like automobiles, appliances, and electronics… and partly to social changes like the emergence of advertising and greater access to credit. Lately, here at The Magazinist, we’ve been thinking about the special relationship between advertising and credit.
This is a subject that John Kenneth Galbraith tackled in 1958 in The Affluent Society, and to revisit the book is to wonder again how one guy could be so brilliant and so prescient. He wrote:
“The immediate danger in the way wants are now created lies in the related process of debt creation. Consumer demand comes to depend more and more on the ability and willingness of consumers to incur debt. And there are aspects of this debt creation which are inherently unstable.”
According to Galbraith, advertising’s primary effect on consumer borrowing was “an inexplicable but very real retreat from the Puritan canon that required an individual to save first and enjoy later”-a change in values as well as behavior. In fact, Galbraith noted, the enablement of debt has become as integral to the production process as manufacturing and marketing.
Galbraith was not confident that growth in advertising could be sustained indefinitely. “In a society where virtuosity in persuasion must keep pace with virtuosity in production, one is tempted to wonder whether the first can forever keep ahead of the second. For while production does not clearly contain within itself the seeds of its own disintegration, persuasion may.”
Galbraith saw two potential “seeds of disintegration.” The first was the possibility of diminishing returns in advertising. When everyone is roaring no one’s voice can be heard distinctly, and if advertising’s power to persuade should decline, consumers would spend less and the economy would shrink. We don’t think this seed has sprouted-at least not yet. Despite everyone’s best efforts, advertising hasn’t quite reached the point of total incoherence. Or maybe human tolerance for roaring is higher than Galbraith thought.
The second threat Galbraith foresaw was that, as advertising encouraged people to take on more debt, the likely consequences would be 1) economic uncertainty, 2) unemployment, and 3) lack of growth. We think this may be the seed that sprouted.
“Few things are more satisfactorily established in economics than that debt creation, whether by producers or consumers, is a major source of uncertainty in economic behavior. It has anciently been recognized that times of high income and employment and a generally sanguine outlook are encouraging to both borrowers and lenders. The spending that results from these transactions adds to the general total of purchasing power when, in effect, it is least needed. Under less sanguine circumstances loans are advanced more cautiously. Instead of spending from new loans, there is repayment of old ones and this, as perversely as in prosperity, occurs at the least propitious time.”
An interesting aspect of marketing is that many companies advertise in response to their competitors’ advertising. In other words, the phenomenon builds itself. The interest of business is self-interest. Social change is a cumulative effect.
At the turn of the 20th century the average American family’s annual spending exceeded income by about two percent. Since then consumer debt has continued to rise rapidly for a variety of reasons. Increases were enabled by innovative “instruments” (such as time payments, equity loans, credit cards, payday loans, variable rate mortgages, and student loans), and were propelled by dramatic increases in certain costs (such as healthcare and education). Today the average American worker owes more than he or she earns in a year. Since 1975 total household debt has more than quadrupled ; between 2000 and 2007 total household debt doubled. And we all remember what happened next.
Why do people borrow beyond their ability to repay? There are certainly many reasons. One is necessity-unexpected repairs, medical bills, and so forth. Another is convenience-the simple availability of credit. A third is habit reinforced by persuasion-the kind of persuasion that reminds us all, constantly, that we deserve a higher standard in the Ownership Society-more things, better things, bigger things.
The point here is not that the Puritans were altogether right but that Galbraith hasn’t been proved altogether wrong. The power of advertising to drive spending is indisputable; we wonder whether advertising’s power to increase debt deserves broader examination. The question might be especially relevant to the people who sell advertising.
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Galbraith, J.K.. The Affluent Society. 1958. Houghton Mifflin. Boston.
Downloadable .pdf: “100 Years of U.S. Consumer Spending.” U.S. Bureau of Labor Statistics (U.S. Department of Labor). 2006
Downloadable .pdf: “Forgive Us Our Trespasses? The Rise of Consumer Debt in Modern America.” Ruben, Matthew. 2009.ProQuest.
“How America Spends Money: 100 Years in the Life of the Family Budget.” Thompson, Derek. 2012. The Atlantic.